Monetary tinkering or real reform?

ECONOMIC PERSPECTIVES - 138 - August 2023

It’s a notable rarity for politicians and high-ranking officials to admit to past mistakes; and rarer still for them actually to learn from those mistakes. Mervyn King’s decade as Governor of the Bank of England ended in 2013. He therefore presided over the central bank at the very time that the “temporary” novelty of Quantitative Easing (QE) was enacted, first in the UK and USA, and then mimicked by central banks everywhere. 

Defenders of QE claimed that, whatever its dangers, it succeeded in saving many banks from the consequences of their own greed-driven prodigality: in particular, granting mortgages on hugely overvalued sub-prime properties; offering “liar loans” to borrowers without even rudimentary creditworthiness checks; and monetising the bubble into circulation by wrapping all this dross in parcels of financial instruments carrying Double-A status attached by conflicted rating-agencies, and then “selling” these junk bonds to the next institution in the suckers’ queue.

Critics of QE, on the other hand, don’t need the benefit of hindsight to see that the banks it saved from annihilation were unworthy of the money-showering measures applied by central banks to bail them out - indeed, many of us in this camp bemoaned the complete absence of corrective incarceration that the high-and-mighty banking executives so richly deserved!

The trouble is, it didn’t end there. 

The exhaustive money-printing and interest-rate suppression by central banks became the remedy-of-choice for any and every economic hiccup throughout the ensuing decade. Lord Forsyth, Chairman of the House of Lords Economics Committee, was criticised in City circles for accurately referring to QE as an “addiction”. 

Yet in 2020, just as QE was about to be wound up, the pandemic struck and the Bank, with the tacit connivance of the Treasury, launched another spree of money-printing that enabled banks to buy bonds with money that was then shovelled into circulation through furlough payments, business grants, “Help-to-Buy” loans, universal credit and the host of equally distortive welfare benefits. These now constitute the norm in a society plagued by the dependency that those benefits have cultivated. 

Mervyn King vindicated

As for my earlier reference to Mervyn King, his recent comments clearly demonstrate that he has understood the folly of unlimited monetary proliferation, admitting that central bankers are trained to believe that changes in the money supply and inflation are unconnected. Which is why they didn’t see that the vast amounts of money the Bank printed during the pandemic would fuel inflation - a correlation that not only makes logical sense, but for which there is historic evidence. 

Anyway, the chancellor and the Bank’s governor have now thrust QE into reverse, no doubt hoping that “monetary-tightening” will “squeeze” inflation out of the system and eventually bring it back towards their 2 p.c. target. But interest-rate manipulators have no reliable metrics for identifying the point when “tightening” becomes “throttling”, and their policy is therefore fraught with risk. Trying to lower prices by decreasing consumers’ purchasing power can lead to unaffordable borrowing costs for businesses and higher unemployment - in effect, slowing the economy into recession territory.

All this statistical navel-gazing leaves intelligent citizens in a quandary. Here we are, 25 years after our central bank was granted statutory freedom to set interest rates and inflation targets, an arrangement that has never delivered a functioning economy. Indeed, it would take a truly visionary leader to recognise the need to uproot the Bank’s 1998 mandate and replace it with “protecting the pound’s purchasing power”. By unshackling interest rates from Bank control they will revert to their real function of reflecting the time-preferences of transacting parties, allowing a market rate to emerge.

The necessity of fundamental reform

It’s not too late. The simple fact remains that only sound money and aggressive deregulation will restore Britain’s status as a place that welcomes innovating businesses, also instating tariff-free trade (regardless of reciprocation) enabling manufacturers to source materials and components from anywhere in the world. 

But executives striving to get a grip on their own businesses in this over-regulated compliance-culture of opaque job-titles and fearful managers, will soon face further hurdles. The 300-page “Online Safety Bill” uses the word “duty” more than 300 times! Just the requirement to undertake ”risk assessments” every time a product is modified will discourage companies from bothering to establish platforms in the UK. 

Legislators should heed Parkinson’s second law: “Work expands to fill the time available” - which is why our economy now employs as many people in “human resources” as in agriculture. Such is the habit of nurturing idleness that many universities now employ more administrators than they receive students. 

The alternative to fundamental reform is, of course, more of the same: punishing levels of debt, negative growth and eventual economic collapse.    

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